Leveraging governance for institution building: Lessons from Nepal

SPMP reform initiatives included more community participation in local governance processes.

Strong public institutions are fundamental for citizen-centric development. ADB’s experience in Nepal offers lessons for incorporating good governance reforms as the cornerstone of institution building in other post-conflict and fragile states.

Quality of governance has long been identified as weak in Nepal after sharp deterioration during a decade-long armed struggle from 1996 until the 2006 peace agreement. Based on the Worldwide Governance Indicators (WGIs), during 1996−2017, out of 214 countries Nepal ranked at the bottom 12th percentile on political stability and absence of violence, indicating 98% of countries performed better.

At least 70% of countries ranked higher than Nepal on government effectiveness (24th percentile), control of corruption (28th percentile), and regulatory quality (29th percentile). Rule of law (31st percentile) and voice and accountability (32nd percentile) were only slightly better.

Even during the post-conflict period, Nepal suffered from political fragmentation and instability, and effectiveness of government remained inadequate in service delivery amid overwhelming social and economic challenges. The 2015 Constitution transformed Nepal into a federal democratic republic with federal, provincial and local levels, and aspired to strengthen inclusive governance and proportional representation. These principles were deemed fundamental for regionally balanced economic growth and to strengthen peoples’ participation in local development.

ADB has been supporting Nepal’s institution building during its transition to democracy with governance and public financial management (PFM) reforms since 2001, starting with civil service reforms. When the peace agreement was signed five years later, the conflict had left the country’s public service delivery in such disarray that Nepal urgently needed to improve matters and establish effective accountability mechanisms in the absence of locally elected officials.

ADB partnered with other development partners to support the government’s Local Governance and Community Development Program (LGCDP) during 2008−2012 to empower communities. More than 40,000 community forums were established across the country to improve public services by financing projects prioritized by communities, and to boost local government capacities.

Despite this progress, the LGCDP observed challenges related to misappropriation of funds and high fiduciary risk, both caused by poor PFM at the local level. To prevent such leakages and ensure resources reached the poor and disadvantaged, ADB approved in 2012 the Strengthening Public Management Program (SPMP) to bolster PFM by local governments in Nepal.

The SPMP’s reform initiatives included results-based execution of local government budgets, earmarking of funds for gender and social inclusion, increased community participation in local governance processes, an integrated property tax to strengthen local revenue mobilization, and piloting a web-based IT system to automate PFM at the local level. Even more important was developing an electronic government procurement (e-GP) system to reduce fiduciary risks in a country where 80% of national capital expenditures, worth over $1 billion in FY 2018, come from public procurement.

Additionally, the program carried out for the first time in Nepal a subnational public expenditure and financial accountability (PEFA) assessment to identify governance bottlenecks and to establish benchmarks for measuring progress over time. This video showcases achievements of SPMP.

Overall, the reforms helped Nepal gradually strengthen governance. The 2014 PEFA assessment showed improvement on 61% of PFM indicators ­– especially budgeting and accounting. Modest progress was seen on two WGIs, namely voice and accountability and control of corruption, which ADB programs targeted.

To support the transition to the federal system, ADB recently provided a technical assistance, laying out recommendations on institutional arrangements for a fiscal federalism framework. Preparing and implementing a well-functioning fiscal federalism framework—which requires equitable distribution of resources across the three tiers of government with large vertical and horizontal imbalances, while building local government capacity to mobilize revenues and deliver public services without compromising fiscal discipline—remains a major task to be accomplished.

ADB’s experience in Nepal offers lessons for implementing similar governance and PFM reforms in other developing Asian countries, and in conflict-ridden and fragile states that are in transition to democracy.

For instance, improving governance and PFM constitutes a key building block for strong national institutions, which in turn are critical for efficient and sustainable development operations. Institutional reforms require continuous engagement rather than a one-time intervention to generate lasting change – especially in the attitudes and behavior of government officials and the public.

Governance and PFM reforms should be institutionalized, rather than driven by individuals, for their impact to be long lasting, particularly in an uncertain political environment. These reforms also need to be holistic and well coordinated, with strategic linkages at national and subnational levels.

Development partners can jointly promote the acceptance of politically difficult reforms. International best practices and advanced reforms should be tailored to local conditions, and piloted with a strong capacity-building component before scaling up.

IT-based PFM and e-governance systems can transform the effectiveness of public administration, service delivery, and accountability to citizens. Going digital should be prioritized.

Finally, governance and PFM reforms must not overlook the subnational level to strengthen grassroots reforms and to avoid overemphasizing centralized initiatives as often happens with governance related interventions. When carrying out these reforms, it is important to map out clear functional assignments from the outset to avoid duplication or overlaps at different government tiers.

Support from central government agencies and continuous communication with government officials, development partners, and civil society are essential for stakeholders to own the reforms and keep them on track even in uncertain economic and political context. Change will come, but incrementally over the long term, with transformation of local and institutional capacity.